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Wheeling-Pittsburgh Reports 2nd Quarter Results
08/13/2007 - Unplanned outages at the EAF, higher-than-anticipated scrap costs, and weaker-than-expected market conditions contribute to Wheeling-Pittsburgh’s net loss of $41.6 million on net sales of $467.0 million for the quarter ended June 30, 2007.
Wheeling-Pittsburgh Corp. reported a net loss of $41.6 million on net sales of $467.0 million for the quarter ended June 30, 2007.
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According to the company, its auditors reached their conclusion that there is substantial doubt about the company’s ability to continue as a going concern because they are unable to consider the possibility of other actions that could be taken to alleviate the situation.
These actions include the company’s proposed merger with Esmark, which will infuse $50 to $200 million of fresh equity. According to the company, the merger would also prompt a refinancing of the revolving credit facility, which should provide substantial additional liquidity. The merger also brings to Wheeling Pitt the cash flow from the Esmark companies, as well as an eventual material improvement of the combined company balance sheet.
The companies have also negotiated a long-term strategic slab relationship with E2 Acquisition Corp to purchase large volumes of slabs from Sparrows Point at below current market prices. These purchases would begin upon closing of the Sparrows Point acquisition. Logistics have not yet been finalized.
The company has also entered into a vendor relationship with Tube City that has helped begin to stabilize the company’s scrap supply situation; received a proposal to refinance bank borrowings before the merger; and put in place a $125-million ‘shelf’ registration statement that would enable the company to raise additional debt or equity on relatively short notice. The company was also recently awarded a verdict in excess of $225 million in the Massey coal-supply litigation.
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The operating loss of $35.4 million compares to operating income of $19.3 million for second quarter of 2006. Steel shipments totaled 684,592 tons ($682 per ton), which compares to steel shipments of 667,944 tons ($717 per ton) for the second quarter of 2006 (excluding non-steel product revenue).
Net sales totaled $467.0 million as compared to net sales of $493.9 million for the second quarter of 2006. Last year’s net sales included $15.0 million from the sale of coke to the company's joint venture partner. The decrease in net sales was due to a $35/ton decrease in the average selling price of steel products sold and a decrease in the sale of coke (due to deconsolidation of the Mountain State Carbon joint venture, effective January 1, 2007) offset by an increase in the volume of steel products sold.
Cost of sales totaled $474.3 million as compared to cost of sales of $445.4 million for the second quarter of 2006.
The current cost of sales was reduced by a $9.5-million insurance recovery related to a prior-year claim. Last year’s cost of sales included the cost of coke sold ($11.5 million), and was reduced by an insurance recovery of $0.6 million related to a prior-year claim.
Cost of sales of steel products sold during the quarter totaled $483.8 million ($707 per ton) versus $434.5 million ($651 per ton) during the second quarter of 2006. According to Wheeling-Pittsburgh, the $49.3-million increase resulted principally from a $56/ton increase compounded by the increased volume of steel products sold; and the per-ton increase resulted principally from unplanned outages and the changing costs for certain raw materials including scrap, pig iron, and purchased slabs. (In contrast to the other major raw materials inputs, the cost of coke was lower than it was for the second quarter of 2006.) Because Wheeling-Pittsburgh has been a spot player, selling price and scrap cost changes impact the company more quickly and dramatically than other companies that have more contracts in these areas.
Liquidity at the end of July was $39 million under the company’s revolver credit facility, and there is $14 million in cash. According to the company, these are materially higher levels of liquidity than existed when the current management team assumed their positions.
Management Remarks—As a result of substantial losses to date in 2007 and the use of cash for operating expenses—principally due to higher scrap market prices, changes in vendor contracts, and decreased selling prices and volume as well as for capital investments—management anticipates that the company may require additional liquidity in the foreseeable future.
According to the company, these losses, together with the company’s earnings outlook, make it likely that the company will not be able to comply with its financial covenant under the Term Loan agreement, which becomes effective on April 1, 2008. While the company has been able to obtain relief from such covenants in the past, at this time there can be no assurance that results can be improved, additional financing can be obtained, or that relief from the Term Loan covenant will be granted.
The company’s auditors included an explanatory paragraph indicating that there is substantial doubt about the company’s ability to continue as a going concern in an amendment to its Form 10-K, which was filed this week as part of the SEC filings related to the company’s proposed merger with Esmark. In connection with this filing, the company reclassified $286.5 million of long-term debt to a current classification as of June 30, 2007.
"Our second quarter results were disappointing,” said James P. Bouchard, Chairman and CEO. “As we have previously indicated, results were impacted by unplanned outages of the Electric Arc Furnace in April, higher-than-anticipated scrap costs, as well as weaker-than-expected market conditions. We knew at the time of the proxy contest that Wheeling-Pitt's cost structure had to be lowered and that this would take time to accomplish.
“There are several actions which we could take to alleviate the liquidity situation. First and foremost, among these possible actions is the proposed merger with Esmark, which will infuse between $50 and $200 million of fresh equity into the combined company. We expect to refinance our revolving credit facility in connection with the merger, which should provide substantial additional liquidity. The merger also brings to Wheeling Pitt the cash flow from the Esmark companies. Post-merger, there is also material improvement of the combined company balance sheet. The merger is proceeding as planned under all of the terms and conditions agreed to by the Boards of Wheeling Pitt and Esmark."
Wheeling-Pittsburgh is a steel company engaged in the making, processing and fabrication of steel and steel products using both integrated and electric arc furnace technology. The company manufactures and sells hot rolled, cold rolled, galvanized, pre-painted and tin mill sheet products. The company also produces a variety of steel products including roll formed corrugated roofing, roof deck, floor deck, bridgeform and other products used primarily by the construction, highway and agricultural markets.
